After businesses faced disruption in 2020 and 2021, India Inc had hoped 2022 would be a year of revival. However, Omicron, a new strain of Covid, which surfaced towards the end of 2021, had other ideas. The mood became sombre in the initial months of the current year.
Hope was again back in the air with vaccination having picked up and the new strain of virus not being lethal. The hope, however, proved shortlived with the start of the Russia-Ukraine war that upset the supply chain management of companies across sectors and inflationary pressures rose.
In some ways, history seems to be repeating itself. Just at a time when companies were inching towards consolidation mode, and take-off would have been the next probable step, the rise of Covid cases in China has once again put a question mark on whether 2023 would bring back revival in full throttle or supply chain issues would once again drag several sectors.
It’s difficult to take a call on the course 2023 will take but one thing is certain – India Inc is seeing the year with hope of revival and growth and a pick-up in private capital expenditure. If the rising Covid cases throw an element of uncertainty in this hope, it’s discounted with the two years of learning by both the government and companies in handling such situations.
Sanjiv Mehta, MD and CEO of Hindustan Unilever, says, “The country has slowly but surely come out of the last couple of years of unpredictability demonstrating strong resilience. As we enter the new year, the world will continue to battle a volatile external environment and the threat of another wave of Covid-19 still hangs over our heads”. But Mehta goes on to add, “It is a delight to witness the new India transition into a beacon of change and hope for the world. There is a lot of optimism in the country, and India has rightfully earned a bright spot on the world stage.”
According to him, India’s long-term growth fundamentals have strengthened, and it is increasingly being seen as a preferred investment destination. “Notwithstanding global uncertainties, I remain optimistic that this decade and beyond are going to be India’s glorious period backed by structural reforms and supportive policy measures which will continue to provide an enabling environment for Indian industry and entrepreneurs to flourish,” Mehta adds.
The biggest challenge before India Inc in 2023 would be tackling the inflationary environment which had an adverse impact on demand and consumption in 2022. “The inflationary environment and resultant price hikes saw consumers tightening their purse-strings and even downtrading to smaller packs in case of FMCG products,” Mohit Malhotra, CEO, Dabur India said.
Companies are exhibiting hope and expecting revival in rural demand in 2023. “We are cautiously optimistic of the year 2023 and hope to see a revival in rural demand. It is felt that urban demand growth will continue to be driven by emerging channels like modern trade and e-commerce,” Malhotra added.
The outlook provided by several brokerages indicate that consumption of low-income households would recover slowly as their incomes and balance sheets gradually recover from the devastation of Covid in 2020-21 and high food inflation in 2022. It is projected that the ongoing recovery in economic activity in the affected sectors of hospitality, retailing, tourism, transportation and travel will drive spending on basic staples and low-end discretionary items, and lower food inflation will result in higher real income and greater ability to spend on non-food items. It’s the low-income households in both rural and urban India, which saw severe disruption in jobs and income in 2020-21 and struggled with high food inflation, so it’s imperative that income and consumption recovers here.
However, a big risk cannot be discounted — the global economy has still not normalised and it would have its impact on the Indian economy also in 2023. “If the recent statements by Vladimir Putin that he’s looking to end the Ukraine war materialises, then it’s going to normalise the global economy and the same would have a positive impact on Indian economy also,” Maruti Suzuki India chairman R C Bhargava said. He said that the semi-conductor crisis has eased but is not over and would continue in 2023, at least during the first half of the year.
According to him, unless there’s demand creation, private investment is unlikely to take off. Pointing out that new demand creation was not taking place, Bhargava said that during the current fiscal, passenger vehicle growth would be around 4%, and it’s going to remain the same next year also.
If India Inc’s performance is taken into account, the challenge in 2023 would be to offset pressure on their margins. If the July-September quarter performance of 625 listed companies (excluding financial sector entities) is taken into account, it shows positive trends with revenues growing 27.3% year-on-year. All the major sectors reported growth in revenues during the period with sectors like hotels, oil & gas, airlines, and power reporting sizeable growth, albeit on a low base. However, companies were unable to realise the benefits of the revenue growth in their earnings performance, with the operating profit margin contracting on both y-o-y as well as a sequential basis to multi-year lows.
The operating profit margin of India Inc, in fact, contracted by 455 basis points on a year-on-year basis to 14.5% during the quarter, according to an analysis by rating agency Icra. Similarly, according to a Crisil analysis, corporate profitability contracted 300 basis points y-o-y in the September quarter, marking the fourth consecutive quarter of on-year decline.
Going ahead in 2023, analysts expect that while margin pressures are likely to ease gradually due to the recent trends in softening of commodity prices, uncertainties still remain due to the geo-political situation. Despite some softening and stabilisation of commodity prices in recent months, India Inc’s ability to arrest the slide in earnings will be dependent on factors like energy cost inflation, evolving recessionary trends in developed markets, and the impact of fluctuations in forex on both imports as well as export-oriented sectors.